Earth, Water, Fire: How to Protect Your Clients' Homes

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This is an extended version of the article that appeared in the December 2013 issue of Investment Advisor.

If coastal homes aren’t getting hit with storms, they’re getting hit with higher insurance rates. Wildfire hazard risks are escalating for those in fire zones. People who never thought of themselves as living in earthquake zones are finding out that fracking can change all that—and that they may not be covered for the damage. Worse, they may find themselves liable for it and more if a fracking operation takes place on their property.

What’s an advisor to do?

Have a conversation with clients about property locations and coverage before trouble strikes, or turn to an insurance professional who can.

Take those coastal homes, for instance. It’s not news that insurers have been raising rates or exiting high-risk coastal areas altogether. Look for more of that to happen in the wake of Hurricane Sandy, as flood zone maps are redrawn and new building regulations take effect.

What is news is the spike in federal flood insurance rates. Thanks to the passage of the Biggert-Waters Flood Insurance Reform Act of 2012, which requires premiums for flood coverage to reflect actual risk, both homeowners and new buyers are finding that premium rates are escalating exponentially. Subsidies were eliminated as of Oct. 1. No more grandfathering of existing policies, either; someone who’s lived outside a flood zone for years but carried a policy anyway will suddenly be paying much more if a redrawn flood zone map depicts them as living in harm’s way.

Home values in at-risk areas are plummeting, too, as would-be buyers opt out of properties that could see them paying thousands for flood insurance—in some cases 10 times as much as before, with $10,000, $20,000, or even more than $30,000 premiums—in addition to their homeowner’s policies. And, of course, flood insurance is mandatory for many mortgages.

While there are bipartisan calls for the law to be delayed or even rolled back (the law was passed with bipartisan support to shore up the health of the federal flood insurance program, which was deeply in the red—$20 billion after Hurricane Katrina alone, never mind Sandy), given the current state of Congress, action is not likely to happen any time soon.

So much for that cheery news. Now on to fire. The 2013 CoreLogic Wildfire Report, released in October, indicates that more than 1.2 million homes, with a combined total property value estimated at more than $189 billion, are at high risk of wildfire damage.

If that’s not scary enough, more than 268,000 homes were assigned a “Very High Risk” rating, with “total residential exposure valued at more than $41 billion.” CoreLogic also assigned risk ratings to houses in danger because of their proximity to other homes in danger: a whopping total of more than 1.5 million homes that together represent a combined potential property value of more than $224 billion. Colorado, California and Texas are the states with the highest exposure in terms of number of homes.

But here’s the kicker: As people seek out homes closer to the wilderness to escape cities, they boost their danger from exposure to wildfire. Almost 60% of new homes built between 1990 and 2008, the report says, were located in the wildland urban interface, “the precise area where urban development and wildland intersect.”

Insurers are requiring homeowners to clear areas around their houses to create “defensible spaces” where embers blown from nearby fires are less likely to catch and spread. At least one insurer has started reassessing homes as their policies come up for renewal and adding these requirements.

Scared yet? Now on to earthquakes.

Hydraulic fracturing, the process known as fracking, for natural gas has been in the news a lot lately, but advisors may not be aware of the earthquake “swarms” that have been reported at or near fracking sites or water disposal sites. The fracking process uses vast amounts of water that, once contaminated with chemicals, must then be disposed of.

According to U.S. Geological Survey data, since 2008, the average number of earthquakes in central Oklahoma has risen from between one and three to around 40 per year. While there is a study out of Durham University in England saying that fracking does not present a significant earthquake risk, it also says that the process can activate dormant faults.

Dormant indeed. In 2011, a 5.6 magnitude quake hit Prague, Okla. The largest earthquake ever recorded in the state, a Columbia University study linked it to the injection of fracking wastewater. It injured two people, buckled a federal highway, and destroyed 14 homes.

Conventional homeowner’s insurance doesn’t generally cover earthquakes, unless the homeowner has a specific rider. However, earthquake insurance may not cover quakes caused by fracking or wastewater disposal, or the liability from them—particularly if the homeowner made money from a well on his property, since that classes it as a business venture.

So have a chat with clients about their coverage. It could prevent a lot of problems later.

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